This is Part 3 of a series of posts analyzing and detailing federal investments in clean energy innovation using the Energy Innovation Tracker. Part 1 defined “clean energy innovation” and Part 2 broke down the federal clean energy innovation budget.

Why Government Investment in Demonstration Projects Can Be Controversial

Transforming the U.S. (and global) energy system from fossil fuels to low-carbon technologies requires a healthy, publicly supported innovation ecosystem that invests in and supports research, development, demonstration, and deployment. But as discussed in Part 2 of this series, America’s energy innovation ecosystem is “hollowed out”, particularly because of reduced investment in technology demonstration projects.

At its very basic level, technology demonstration projects exhibit full-scale models of first-of-kind technologies and systems, as opposed to pilot projects (e.g. an ARPA-E project), which aim to simply prove a technical idea. Demonstration projects aim to prove a technology at commercial scale.

Clean energy demonstration projects are an area of extreme policy debate and controversy for two reasons. First, clean energy demonstration projects are often capital-intensive projects that require significant investment and public-private collaboration, typically invoking considerable attention because of large budgets. Second, clean energy demonstration projects are often viewed as too close to market and not an appropriate role of government investment. As such, it’s a turbulent area of clean energy innovation policy.

The Purpose of Demonstration Projects

Criticisms aside, clean energy demonstration projects serve a number of important innovation-related purposes. Demonstration projects communicate potential commercial applications to consumers and manufacturers. They also provide energy producers with the opportunity to collect and evaluate data on technology performance under commercial-scale conditions.

Good demonstration projects efficiently showcase the technology to maximize interest, and all demonstration projects look different depending on the technology and can vary from large-scale smart grid technology installations to model homes showcasing emerging building technologies, plus everything in between.

Historically, a common characteristic across the board is that demonstration projects represent a crucial role in technology development because of the opportunity they offer to accelerate technologies across the commercialization valley of death and into the market.

As a result clean energy demonstration projects have played a role in America’s overall clean energy innovation strategy. The figures below indicate federal investment levels for demonstration projects during FY2009-FY2012, revealing two distinct implications.

Investment Via the Recovery Act

First, the Recovery Act alone increased demonstration project investment to almost $2.6 billion, and was complimented by scant fiscal year appropriations. Second, in the absence of direct spending on Recovery Act programs, the Recovery Act’s loan guarantee programs (particularly the Title XVII Section 1705 and the Advanced Technology Vehicle Manufacturing loan programs) provided a substitute for support in FY2011, but because of the political fallout from the Solyndra bankruptcy, has stopped being a source for demonstration support.

Direct spending and loan programs are obviously not immediate substitutes for each other, however. Direct spending describes federal appropriations and grants for clean energy projects, while loan guarantee programs only support the temporary financing of debt – the federally appropriated funds for the loan guarantee programs is essentially only enough to cover the possible cost of loan defaults. After the Recovery Act, in other words, direct spending on clean energy demonstration projects fell from $1.3 billion in FY2009 to only $56 million in FY2011.

While DOE ARRA funds and loan guarantees provided about 80 percent of the financial support for clean energy demonstration projects in FY2009-10, the Department of Transportation’s Funding for Transportation Electrification Initiative provided $400 million during the two fiscal years – the program awarded eight projects with funding for the demonstration of “grid-connected vehicle and infrastructure” projects, including charging stations, to accelerate large-scale data collection of these technological impacts to the grid.

The Recovery Act diversified investment in demonstration projects across at least ten technology categories, although significant funding was awarded to larger projects like the Department of Energy’s Clean Coal Power Initiative demonstration project (which supplemented an existing project with funds for exploring emerging carbon sequestration technologies), as well as the Smart Grid Regional Energy Storage demonstration project (which invested in several large-scale grid demonstration projects that installed emerging battery, flywheel, and compressed air storage technologies to electricity grids across the country). In FY2012, the only two supported demonstration projects both investigated hybrid and all-electric vehicles.

Conclusion

It’s important to note that while this post characterizes federal support for demonstration through direct spending or loan guarantees, the government does provide additional, indirect support for demonstration projects through work within the National Lab system. For instance, the National Renewable Energy Laboratory (NREL) runs the Wind Technology Center which allows wind companies to test and demonstrate new turbine and blade technologies in the field at industries cost. In this case, NREL provides industry with access to unique technologies and facilities as well as to their world-class scientists to work out research-related issues with emerging wind power designs.

Even with the critical support at the National Labs, disjointed clean tech policy, coupled with stop-and-start funding for demonstration projects slows the development of breakthrough energy technologies. This is an endemic problem within the clean energy technology sector and requires more investment and new policy support. Before deploying clean energy technologies to a market faced with significant pricing competition, certainty that the technology is market-ready is necessary, and demonstration projects provide that availability of information.

Matthew Stepp is the Executive Director for the Center for Clean Energy Innovation specializing in climate change and clean energy policy. His research interests include clean energy technology development, climate science policy development, transportation policy, and the role innovation has in economic growth.